In that sense, we believe this to be an opportunistic budget, as it aims to buoy India’s GDP growth via the consumption channel in the backdrop of worsening global macroeconomic environment.

We believe that this policy shift towards buoying rural demand will be decisive in sustaining 7-7.5 per cent GDP growth in fiscal year 2017.The fiscal year in India runs from April to March. Moreover, by maintaining its commitment towards fiscal consolidation (3.9 per cent of GDP in fiscal year 2016; 3.5 per cent in fiscal year 2017 projected), the budget not only surprised the markets but also left some room for further monetary loosening.

Of course, a close look at the budget document reveals some corrosion in expenditure budget with capital expenditure probably remaining stagnant in real terms.

This need not necessarily imply a shift away from capital expenditure but could mean that the government is counting primarily on Public Private Partnerships and other resources for infrastructure financing.

The budget disappointed in terms of provisions for public sector bank recapitalisation.

This may also be viewed as an affirmation of independence and sovereignty of the Reserve Bank of India that has already come up with a framework to address the issue.

Boost to rural consumption demand

Farm loan interest subvention and the seventh pay commission announced in the budget, will help boost consumption demand particularly in the backdrop of lower crude oil prices.

Crucially, reforms around crop insurance (Fasal Bima Yojana) and health insurance to cover hospitalisation for everyone associated with agriculture will likely have medium- to long-term gains for consumption demand.

According to Modigliani’s life cycle hypothesis, individuals try to even out consumption over their lifetimes.

While making an inter-temporal decision, a farmer whose income is both seasonal and uncertain, savings outweigh consumption demand in order to even out consumption in absence of income over non-harvest months.

As a critical step towards addressing this uncertainty in farm income is the new crop insurance scheme. With reduced uncertainty around crop failure, the farmers are being incentivised towards consumption.

Similarly, the scheme around health insurance stimulates consumption given seasonality in farm income. Of course, the success of the proposed programmes will largely depend on how well they are implemented but we think it is a vital policy step in the right direction.

Revenue versus capital expenditure

With revenue expenditure rising much faster than capital expenditure, suggesting a worsening in the quality of expenditure.

Under usual circumstances, such a shift in expenditure pattern may be suboptimal but given tough global macroeconomic environment, this rise in revenue expenditure to boost consumption is likely the government’s best bet to boost growth in the near term.

Given that a number of infrastructure projects have been announced without the capital expenditure showing for it indicates government expectation of other sources for financing for these projects.

Not surprisingly, the budget saw reforms including the PPP laws including Public Utility Resolution and Disputes bill.

The key disappointment from the expenditure budget came in the form of persistence in high subsidies.

With the announcement of Direct Benefit Transfer (DBT) of subsidies, we expect this to come off, helped by greater efficiency and smaller leakages.

The way forward

Looking ahead, we believe that much of the solutions to its problem of the twin deficit — fiscal and current account — will come with a widening of the tax base.

Including agricultural income into the tax base is increasingly necessary particularly as not only the recent reforms but older ones such as marginal support price (MSP), subsidised fertiliser and water have helped raise farm incomes.

Additional measures announced in the budget to include crop insurance along with employment guarantee schemes such as MGNREGS and the new schemes such as 100 per cent rural electrification provide a case for bringing agriculture under the tax net.

Apart from the intuitive benefit to lessening the fiscal gap this will help reign in spending on gold that form an important asset class of a rich farmer.

Given that gold along with crude oil imports are pivotal in widening the current account deficit, taxing farm income with kill two birds with one stone.